On testing the joint hypothesis of short term interest rate: a signal extraction approach

In this paper, I shall implement a methodology to identify and measure the ex ante real interest rate from the ex post real interest rate that involves application of signal-extraction techniques from the engineering literature. Diagnostic tests indicate that these methods are quite successful in capturing the essence of the time series properties of the ex ante real rate. The estimated model indicate that the variance of the ex ante real rate is not zero and the ex ante real rate may even follow a random walk stochastic process.